G8 Education on track

GEM has taken strong steps to improve its relationship with investors and we’re happy with the direction.

Following a strong share price run and an announcement on funding at childcare operator G8 Education (GEM), we believe the company remains on track to continue to deliver a strong income stream and healthy profit growth. The company has taken a number of steps in recent months to assist the reputation of the business, including the appointment of new auditors, a new chairman, and a new non-executive director. These initiatives are welcomed and will go some way to re-establishing market trust in the underlying business. In addition to this, the company has also announced that it will refinance $S260 million of its fixed rate notes. While it may seem a sideways step in progress to refinancing debt back to Australian dollars, this will also add a call option to the notes, and that is considered a more favourable term for GEM equity holders.

Board changes and CFO

The board changes appear to have been well received by the market and the company’s share price has responded with a strong performance in recent months. Despite this, a question still remains as to the replacement of recently resigned chief financial officer Chris Sacre. At the time of Sacre’s resignation, it was indicated that he would stay with GEM until a suitable replacement is found. This is something we hope will be achieved in the near term.

Fixed rate notes

As mentioned, GEM is looking to redeem the currently outstanding fixed rate notes for up to 102 per cent of the face value, depending on the timing of acceptances. The funds will be sourced from a new issue of similar notes, with the company needing to bridge a small (around three days) gap where both issues will be outstanding. However, there is also a proposal to amend to the terms allowing for a call option to be inserted into the terms of the current notes not redeemed – this would allow GEM to buy back the notes at 101.5 per cent of the price, with three business days notice. The company needs 75 per cent approval from noteholders in order to effect a compulsory acquisition of the remaining noted.

Overall, this might seem a strange announcement. GEM will still have SGD denominated debt and predominantly AUD denominated earnings. However, the insertion of a call option and redemption of the 2017 expiry notes will improve the maturity profile of the debt outstanding. Additionally, in discussions with GEM management it was noted that the current notes are fully hedged and the new issues will also be fully hedged in terms of currency. Finally, the maturity of the new notes will be in three years’ time, so this is a refinance to extend the company’s debt maturity profile. The changes to the company’s debt structure are subject to approval of the current note holders.

Current recommendation

We continue to cover GEM with a buy recommendation. In particular we are pleased that the company has taken steps to improve its relationship with investors, and is paying keen attention to its capital structure. Our valuation remains unchanged at $4.12 ($3.99 today). GEM will hold its AGM on May 25 2016, but we don’t expect any further material updates at this stage.